There has been an overwhelming number of questions asking where the markets are going and what should individual investors do, given the volatility of late?
While I try to answer those first two question on a regular basis, let us take another crack at the problem. As I have said in the past, fear, hope and greed are often the driving forces on Wall Street. Furthermore, speculators play off those emotions to book a quick profit. However, you are an investor, not a speculator.
Try to ignore the Street’s daily volatility and instead obligate yourself to undertake the necessary analysis to determine the strength of a corporation’s financials and operating strategy.
While many prognosticators would have you believing otherwise, the world is not totally falling apart despite the ongoing scourge of COVID-19. At the same time, this reporting season is unlike any we have seen for some time.
According to Bloomberg, the deprivation of corporate outlooks and updates ahead of second-quarter earnings, the Street is flying blind as it tries to forecast corporate futures.
Approximately 19% of those S&P 500 companies that have now posted per-share earnings have seen their numbers exceed or miss Street estimates by 50% or more. There have not been errors of that magnitude since before 2010.
Quarterly earnings that far away from consensus are normally attributable to highly speculative stocks. You would not expect this from the 500 largest U.S. companies where an average of 21 analysts cover each firm.
However, it would be unfair to simply blame the analysts when you consider that an avalanche of firms pulled their projections earlier in the year, citing uncertainty around the pandemic.
Only about 50 firms in the S&P 500 index provided guidance for the current earnings season, as compared to an average of 106 in the three prior quarters. Meanwhile, reactions to those chalking up that wide of a margin on earnings is muted as the focus is on forward guidance.
Overall, about 149 companies in the S&P 500 index have announced results for the second quarter. Of those, 82% exceeded Street estimates. Compare that to the 76% for the whole season a year ago, according to data compiled by Bloomberg.
Approximately 15% have posted worse-than-expected earnings as compared with 19% a year ago. Companies exceeded revenue estimates 61% of the time, while 23% missed. A year ago, the numbers were 35% and 26% respectively. At the same time, the S&P 500 index has gained 7.6% since the start of the current earnings season.
As to the market’s future, keep in mind that there have been great times, good times, and some not-so-good times when it comes to investing. Nonetheless, over the years I have reached the conclusion that it is more difficult to lose money investing in stocks than it is to make money.
Nonetheless, investors and investment advisors often take that effortless short-cut of letting others do the thinking. Yes, in the long run the markets will move ahead and therefore so will index funds and mutual funds.
However, those are investment avenues fraught with high fees, higher risk and less return than buying exchange traded funds (ETFs) or individual stocks. It is just that individual stocks will do better.
Virtually anyone can invest successfully. There are literally dozens of well-known, high-quality blue-chip companies with a long history of earnings and dividend growth with which anyone can build a solid portfolio. No, you will not become another Warren Buffett next week, but you will enjoy steady investment gains over time.
While large cap companies, such as Procter & Gamble, are not going to grow as fast as the latest high-tech startup, seasoned large cap companies should be the bedrock of every portfolio.
With your foundation in place, you can satisfy a desire for greater action, it that motivates you, and add some high-quality small cap companies. They will enable you to achieve higher returns in a somewhat shorter time. However, never lose sight of the fact that risk and return are different sides of the same coin.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.